It’s the age-old question that has challenged startups and SMEs alike for decades:

“How are we doing?” 

Phew, that’s a loaded question. It’s not as simple as good or bad; many factors go into gauging the progress of your startup. Gathering quantitative information on performance brings this high-level concept of “How are things?” to a more definable and objective perspective. To do so, best practice is to use metrics to measure progress, identify areas of improvement and validate your strategies. But the big question is, which metrics should you really be focusing on? That's where the concept of "Hero Metrics" comes into play.

Understanding Hero Metrics

So, what exactly are Hero Metrics? Think of them as the One Metric That Matters (OMTM) for your startup. They represent the key performance indicators (KPIs) that grasp the core of your business and play a vital role in steering your startup in the right direction. But how do you choose the right ones? Well, it depends on your unique business model and the stage of growth you're in. 

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Hero Metrics are the fundamental metrics that are most closely aligned with your startup's objectives.  

Selecting the Right Metrics

Choosing the right Hero Metrics is a strategic decision that depends on two primary factors: 

1. Your Business Model - This outlines how your company operates, generates revenue, and delivers value to customers. For instance, in the SaaS sector, metrics like Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Customer Churn Rate are essential to focus on key elements of the model.

2. Stage of Growth - Startups progress through various growth stages, each with different challenges and priorities; your Hero Metric should follow suit. In the early stages, you might focus on metrics that gauge product-market fit and user engagement. This could include tracking the number of active users or revenue growth month over month. As your startup scales, revenue-related metrics, such as Annual Recurring Revenue (ARR) or Customer Lifetime Value (LTV), could become your Hero Metrics.

Revenue Metrics

Now, here's where it gets interesting. While ARR or MRR (see below for definitions) may be your ‘North Star’' KPI, it's not perfect. It doesn't tell the full story because it only shows the quantity, not the quality of the revenue. This is where "Hero KPIs" step in. They guide your financial models, budgets, projections, and strategic decisions, especially when your ARR isn't looking so hot. This can save funding rounds.

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Some examples of Revenue Metrics are: 

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Monthly Recurring Revenue (MRR): MRR represents the total recurring revenue generated from your customers every month. It typically includes subscription fees, service charges, or any other recurring revenue sources. For example, if your SaaS company has 100 customers paying $50 monthly for your software, your MRR would be $5,000.

Annual Recurring Revenue (ARR): ARR is the yearly equivalent of MRR, and it calculates the total recurring revenue generated by your customers over a year. So, if your SaaS product generates $5,000 in MRR for a full year, your ARR would be $60,000.

To be included in the MRR or ARR calculation, this revenue must be truly recurring. New monthly revenue added to February will only be included in the MRR calculation once the charge has recurred in March. 

For companies that sell annual subscriptions to their software but want to track MRR, you would include the monthly value of the subscription to your MRR calculation for the duration of the subscription term - in this case, 12 months. 

Gross Profit: This is the revenue remaining after subtracting the direct costs of producing goods or delivering services. It reflects the basic profitability of your business before considering other expenses. If your e-commerce store generated $20,000 in revenue and the cost of goods sold (COGS) was $8,000, your gross profit would be $20,000 - $8,000, which is $12,000.

Customer Metrics

It's crucial to keep in mind: when analyzing your customers, make sure to look at different customer groups separately! Each group exhibits unique behaviours, and ignoring these distinctions can not only skew the overall metrics but also lead to less-than-optimal decisions. Look at how these customer groups make purchases, adopt your product, and modify their subscription plans.

It's important to note that customer groups, known as cohorts, are not set in stone. If there's a significant change in your product's features or pricing, it's a good time to re-evaluate how you segment your customers. Just as you should consider re-grouping when you notice noticeable shifts in how customers spend, adopt, use, or expand their engagement with your product.

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Some examples of Customer Metrics are: 

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Average Revenue Per User (ARPU): ARPU measures the average revenue generated per individual user or customer. It helps assess the average spending of your customer base. Let’s say your website has 1,000 customers and generates $10,000 in revenue from those customers; the ARPU would be $10,000 divided by 1,000, which is $10.

Customer Lifetime Value (CLTV or LTV): LTV calculates the total revenue a customer will generate for your business throughout their entire relationship with your company. If your online streaming service expects a customer to stay subscribed for an average of 2 years, and they pay $15 per month, the LTV would be $15/month x 12 months x 2 years, which equals $360.

Customer Acquisition Cost (CAC): CAC measures the cost of acquiring a new customer, including marketing, sales, and advertising expenses. If you spent $10,000 on marketing and sales efforts in a month and gained 100 new customers during that same period, your CAC would be $10,000 divided by 100, which is $100 per customer.

LTV:CAC Ratio: The LTV:CAC ratio quantifies the value a customer brings over their lifetime compared to the cost of acquiring them. A high LTV:CAC ratio indicates efficient customer acquisition, while a low ratio may suggest less favourable ROI. For instance, if your SaaS company has an LTV of $3,000 and a CAC of $1,000, the LTV:CAC ratio would be 3. This ratio signifies that, on average, for every $1 spent on acquiring a customer, you can expect $3 in return over the customer's lifetime. A ratio of 3 indicates efficient conversion of acquisition costs into long-term customer value.

Churn Rate: This indicates the percentage of customers who cancel or stop using your product or service over a specific period. If you had 500 customers at the beginning of the month and lost 50 customers during that month, your churn rate would be (50/500) x 100, which is 10%.

Conclusion

By selecting your Hero Metrics wisely, based on your specific business model and growth stage, you can clearly focus on what truly matters for your startup's growth and development. The power of Hero Metrics lies in their ability to provide actionable insights that drive informed decision-making and ultimately guide you to growth.